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Retirement interest-only mortgage boom: should you get one?

We explain the interest-only mortgage options for older borrowers

More retirement interest-only mortgages (RIOs) are available than ever before, giving older homeowners a new way to borrow. But is this new type of interest-only product right for you?

There were only five retirement interest-only mortgage products available in July 2018. That number has since ballooned by more than 600%, according to data from Moneyfacts.

Like traditional interest-only mortgages, RIOs require you to pay back just the interest each month, instead of the interest and part of the actual mortgage balance. In most cases, the loan is repaid when you die or move into long-term care.

With the number of retirement interest-only mortgage products growing rapidly, we take a look at who RIOs work best for, and whether you should consider one for yourself.

How fast is the retirement interest-only mortgage market growing?

Originally sold as a type of equity release, RIOs were reclassified by the FCA as standard mortgages in March 2018. By July of that year, only two mortgage providers were offering them.

Just six months later, in February 2019, financial data provider Moneyfacts said there were 38 RIO products available from 12 lenders.

Since then, the market has continued to grow, with at least four more lenders launching RIOs and many of them expanding their retirement mortgage offerings.

Initially, growth was driven by smaller building societies, but in April Which? Recommended Provider Nationwide revamped its later-life lending range, adding a retirement interest-only mortgage product of its own.

And it’s not just RIOs specifically that are growing. Many lenders are making their criteria friendlier to older borrowers, launching retirement-focused repayment mortgages and lifetime mortgages, and creating even more options for homeowners in retirement.

Which? analysis of Moneyfacts data from this week shows there are 141 mortgage products specifically for borrowers aged 50 and over.

For a detailed breakdown of which lenders offer retirement mortgages and how each provider’s products work, visit our RIO mortgage guide.


Are retirement interest-only mortgages for me?

If you’re in or approaching retirement, there are a number of reasons a RIO might be a good option for you.

Lower monthly payments

Homeowners who are yet to pay off their current mortgages can benefit from remortgaging to a RIO.

Since your retirement income is likely to be less than your working income, a RIO’s lower monthly payments could be more accommodating to your circumstances.

Paying off an interest-only mortgage

In the next five years, hundreds of thousands of interest-only mortgages will come to term, leaving many homeowners with bills for the full purchase price of their homes.

Thousands will be unable to pay those bills, and many will be too old to remortgage to a traditional repayment mortgage, leading to what many have called an interest-only mortgage ‘crisis’.

Since they’re open to older customers, and allow you to repay your loan through the sale of your home, RIOs could offer a lifeline to people in this difficult situation.

Cash injection

Many homeowners take out RIOs to pay for renovation projects, such as general home improvement or adapting their homes for reduced mobility.

Others use the cash to help younger family members get on the property ladder or simply to fund their everyday living costs in retirement.

Flexibility

Most RIOs allow fee-free overpayments after a certain point, meaning if you have the money, you can pay off your mortgage early and avoid selling your home at the end of the term.

Check with your lender first, though, as your particular deal may have early repayment charges (ERCs), which could make settling early expensive.

What are the drawbacks?

RIOs might sound great so far, but there are a few things you should be aware of before you apply for one.

  • You may not be able to pass on your home when you die – the loan will usually need to be repaid when you die or go into long-term care. This may mean the home will need to be sold, and could limit how much your family stands to inherit.
  • You might not hold enough equity – as the maximum loan-to-value ratios can be quite low, you will need to own a significant proportion of the property to qualify.
  • You may not be eligible – RIOs tend to have fairly strict criteria, so you might find it difficult to secure one.

Our retirement interest-only mortgages guide has more details on how they work and who is eligible to apply.

The best rates for retirement interest-only mortgages

The table below has a snapshot of the RIO deals offering the best rates at the moment, although with mortgage providers launching retirement products on a regular basis, there could well be more deals available when you come to apply.

All of the deals listed are discount mortgages, but other mortgage types are available.

Things to keep in mind

You shouldn’t choose a mortgage based on rates alone. Product fees, early repayment charges, customer service and your future plans should all form part of your decision too.

Talking to an impartial expert

The number of RIOs is growing, and so is the range of product types that you can potentially choose from.

It can be a bit of a minefield, and it’s worth talking to a whole-of-market broker who can advise you on the best option for your personal situation.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

Categories: Money, Mortgages & property

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